Calculating a willful FBAR penalty: It is kind of strange


Update Janaury 2017: FBAR filing dates have been changed to the date your tax return is due —  not June 30th. This started with your 2016 FBAR being due in 2017. Yet the "loophole" still exists — It just depends on what date your tax return is due.


Many taxpayers are worried about the consequences of not "coming clean," or what a willful FBAR penalty will look like if they opt-out of the standard Offshore Voluntary Disclosure Program (OVDP).


Most people see that there is a penalty equal to 50% of account value and jump to the worst conclusions.  The truth is, calculating a willful FBAR penalty is a bit more complicated. You have to consider reasonable cause arguments that could negate a finding of willfulness, and also FBAR mitigation penalty levels that the IRS FBAR examiners are instructed to follow.


So for this article, we will talk about how the highest, worst-case FBAR penalty is calculated, and how the law is written to totally favor the government.


What date is used in calculating a willful FBAR penalty high balance?

According to the Internal Revenue Manual and 31 U.S.C. § 5321 (a)(5):


Willfulness penalty may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation.


The date of a filing violation is June 30th the date your tax return is due of the year following the calendar year for which the accounts are being reported. This date is the last possible day for filing the FBAR so that the close of the day with no filed FBAR represents the first time that a violation has occurred. The amount in the account at the close of the tax filing due date is the amount to use in calculating the filing violation.


Now, at first glance, this doesn't make all that much sense. It seems to be saying that your account balance on the year following, the year for which you did not file an FBAR is the date the IRS should take 50% of, if they find you willful and no mitigation applies. This rule seems to differ from the highest account balance during the year of the Standard OVDP and year-end value of the domestic streamlined OVDP.


Why it makes sense to use your tax filing deadline of the following year when calculating a willful FBAR penalty

Most people can't figure out this rule concerning calculating a willful FBAR penalty as it just doesn't make sense. Everything was created to greatly favor the government, including calculating FBAR penalties based on the June 30th of the year following, not the year-ending. Why? Because the assumption is that a foreign account will grow, thus resulting in a bigger FBAR penalty. If you need assistance with any unfiled or misfiled FBARs, contact us for a free consultation.